What Is a Private Student Loan?
Private sector financial institutions, such as banks and credit unions, offer private student loans. These loans differ from student loans provided by the federal government. For instance, students may qualify for federal loans as part of their financial aid package. Federal loans for undergraduates do not exceed $12,500 per year.
Since the financial aid and federal loans students qualify for may not pay the full cost of attendance, many students seek private student loans to cover the difference. Individuals may qualify for private student loans that cover the total cost of attendance minus any financial aid they are awarded. However, each financial institution makes its own determination.
- Is Taking Out a Private Student Loan Worth It?
Students may qualify for private student loans by meeting lending requirements (e.g., a good credit score and/or a steady income). Private loans can also save borrowers money if they qualify for interest rates lower than federal rates or deduct loan interest from their taxes. Many private loans require a co-signer, although some offer a way to remove the co-signer in the future.
Unlike the federal government, financial institutions charge fixed or variable interest rates based on market conditions and the credit rating and income of the borrower. Without good credit, you may pay a higher interest rate. With a variable interest rate, your payment could rise in the future.
- How Can You Get a Private Student Loan?
To qualify for a private student loan, you must attend an eligible school and plan to use the loan money to pay for your educational expenses. Some community colleges or trade schools may not qualify, and you may also need to attend school full time.
Typically, to qualify, you must also be at least 18 years old and a high school graduate with a social security number or legal status in the U.S. Additionally, you must meet your financial institution’s credit and income requirements. However, a co-signer can help you do this.
To apply for a private loan for college, you need to provide personal information, including your social security number (and that of your co-signer), birthdate, and address. You should also submit proof of employment and income (i.e., paystubs). Additionally, your bank may ask for financial information such as assets, rent or mortgage, and/or tax returns.
How Can You Choose the Best Private Student Loan for You?
Before selecting a private student loan, do your research and shop around. Compare repayment terms and options, interest rates, and monthly payments for different loan offers. Consider how much your loan will cost you in the long run. Determine which loans you can qualify for based on your credit and income.
Make sure that if a loan requires you to procure a co-signer, you are able to do so. Also, find out if you can remove the co-signer after a period of making payments. Finally, ask about any special features or benefits for any loan you consider.
How to Apply for a Private Student Loan
The first step in applying for a loan is to research your loan options. Pay special attention to the terms of any loan you consider, especially the interest rate, payment amount, and repayment options. Next, gather all the personal information and relevant documents you and your co-signer will need to fill out the application.
Once you complete your application, your financial institution will contact your school to verify your information and eligibility. Your bank will then process your loan and notify you about approval and disbursement of your money.
Alternative Loan Repayment Options
Some financial institutions offer student loan consolidation or refinancing, depending on the amount of your debt. Once you have a job and start making payments, you may qualify for a loan that offers better terms than what you originally qualified for.
Alternatively, you may need to make smaller payments. If so, consider extending the term of your loan or using a graduated repayment plan, where payments gradually increase as your income goes up.